ROME (Reuters) - Italy would oppose capping banks’ holdings of domestic sovereign bonds, Prime Minister Matteo Renzi said on Wednesday, throwing down the gauntlet to European policymakers who are considering a cap to strengthen the euro zone banking system.

The European Commission plans to review the current rules on banks’ exposure to their home countries’ debt as a way to reduce the risk that wobbly public finances might pose to a national financial system.

“We will veto any attempt to put a ceiling on government bonds in banks’ portfolios,” Renzi told the upper house Senate.

The European Central Bank’s chief supervisor has proposed a limit on national sovereign debt holdings at 25 percent of a bank’s equity, but the ECB vice president favours a risk-weighted approach.

Bond markets in Italy and Spain would likely see the biggest impact among major euro zone countries if a cap were imposed, as banks in both countries hold piles of state-issued bonds.

Around 405 billion euros ($451 billion), or 21.6 percent of all Italian government debt, is owned by its banks.

The 41-year-old prime minister said Italy would take a firm line on the issue, adding: “Rather than worrying about government bonds in the banks we should be strong enough to say that (banks elsewhere in Europe) hold too many toxic assets.”

Renzi, who has recently taken several swipes at Germany’s banking sector, mentioned the case of Deutsche Bank, which said last week it would buy back more than $5 billion in senior debt. ($1 = 0.8978 euros)